A word on economic method

Paulo Pinto, University of Sydney

Detractors like to say that Economics is the only field of human knowledge
where two researchers may win the Nobel Prize by saying exactly opposite
things. With this half-joke they aim to address the common situation
of dissent amongst economists in their assertions of what may trigger
a certain economic phenomenon, or alternatively, what may be the cure
for a given economic malaise.

Naturally, when criticized with respect to its feuds, disagreements,
and (according to some) ambiguity, economic science is being compared
in an underlying way to its “better behaving” cousins, namely
physics, chemistry, mathematics and others. Here, the presence of feuds
and disagreements is still a fact but these seem to be more sporadic
and speedily solved if compared to the same events in economic science.

Perhaps the most incommodious aspect of the referred half-joke is that
it cannot be entirely dismissed as nonsense. Economics does produce
some long lasting disagreements, some torrid opinion disputes and policy
divergences. However, far from disavowing the methodology of Economic
Science, these discrepancies and apparent lack of cohesion, reflect the
intrinsic nature of the field economists took up to study. The idiosyncrasies
of the economic field of study are numerous but we can have a glimpse
of some of the most important ones.

When criticized with respect
to its feuds, Economics is being compared to its ‘better
behaving’ cousins.

Firstly, economic science deals with social issues as opposed to the
natural world. The crucial distinction between social and natural phenomena
is that the former present a higher degree of unpredictability than the
latter. Society is composed of individuals and these are not always rational.
Therefore, the aggregate behavior of individuals, which is reflected
by the behavior of society, is beyond the reach of deterministic analysis
and it is as yet unclear whether the use of tools such as chaos theory
(so proper to natural phenomena) would provide anything more than another
approximation. Theoretical models, at times, produce results diverging
from real observations because the erratic microeconomic behavior of
agents is difficult to model and is often assumed to be irrelevant. That
is to say, when studying economic phenomena, theorists assume that the
individual agents act in a rational and consistent manner. By overlooking
irrationality and inconsistency—that might typify the actions
of a significant proportion of the economic agents—theorists
simplify their models but diverge from real world facts.

Second, economics is a non-experimental science. In the natural sciences,
most theoretical divergences between researchers are settled by means
of experiments when definite conclusions are out of reach of pure theory
or mathematics. Consider the case of two physicists examining the problem
of free-fall. The first might say that an object subject to a gravitational
field falls down to earth at an increasing velocity. The second might
say that the drag force of the atmosphere would keep the velocity constant
and reduced. The first scientist uses the example of a free falling rock
to support his conclusion. The second uses the example of a free falling
feather to uphold his. The feud is established. No conclusion will be
reached until they perform the experiment of dropping a rock and a feather
to the ground inside a vacuum container. It will be concluded that none of
the scientists were exactly wrong. Rather, certain circumstances
make the air drag assumption especially strong in the case of the feather
and not as much in the case of the rock. Therefore, none of the scientists
were incorrect despite their conflicting conclusions. Disagreement hinged
on what effects were particularly stronger (outweighing the others) in
a specific situation. If not for the experimental evidence the divergence
would not have been solved and the feud would have remained indefinitely.

Two disagreeing economists may
be in an odd situation where neither is exactly wrong.

The fact that there is almost no experimental analysis possible in economics
offers an explanation for the persistent disagreements between theorists;
thence, the so-called “Schools of Thought” which are also
a phenomenon common in Political Science, Philosophy and Sociology. Being
a non-experimental science is not the isolated “privilege” of
Economics. Gregory Mankiw [1] reminds
us that natural sciences such as Astronomy and Biology (when studying
the evolution of species) are also non-experimental and this also gives
rise to discussions, disagreements, disputes and incongruities.

Interestingly enough, resembling the case of the rock and the feather,
two disagreeing economists may be in an odd situation where neither is
exactly wrong. Take, for example, the current dissent between theorists
concerning wealth inequality and economic growth. Certain economists
say that—in the early stages of development—one inescapable
spin-off of a rise in per capita income is that the rich get richer and
the poor, poorer. Some go further and, perhaps backed by the work of
Simon Kuznets in the 1950’s, posit that a rise in inequality is
actually necessary for growth to take place. Alternatively, a set of
theorists claims to have proven the absolute independence of growth and
inequality. Thus, they argue, an array of tools and policy measures directed
to promoting growth would be, as the jargon goes, inequality-neutral. [2] It
is important for society and policymakers to heed these “battles
of ideas” because by analyzing the reasoning and expositions of
each side, some very practical questions concerning, for instance, the
downgrading of the dole accompanied by tax cuts can be properly
addressed.

A third point is that by dealing with how societies produce or distribute
income or wealth, economics is inextricably entangled with social and
political stances. One sees politicians without economic training talking
freely about economic issues and invoking economic “truths” when
they are actually expressing and defending their own political point
of view or the interests of one social group. Alternatively, one sees
economists delving into questions such as how society should be organized
and how it should be governed. It is undeniable that Smith, Marx, Keynes
and Friedman, among others, occupied themselves with such questions.
With political points of view involved in the equation, it is not surprising
at all that analytical disagreements emerge. Here, the policy debate
amongst American economists during the 1980’s is illustrative:
Defending its very own political stances, the Reagan Administration put
forth policies that reduced progressive tax rates, stimulated the arms
buildup and weakened support for the less affluent. The theoretical economic
backing for these actions was provided by such names as Milton Friedman,
Charles Murray and Arthur Laffer. On the other (weaker) end of the tug-of-war,
John Kenneth Galbraith led the resistance to the ‘Reagan economists’ and
singled out the detrimental impact of their theories upon American society. [3]

Economics reflects the social
and political views of the epoch it tries to explain.

Economics reflects the social and political views of the epoch it tries
to explain. It was so in Smith’s time when England was trying to
have other countries’ markets opened to her industry; when Marx
depicted the brutal oppression of the worker in the industrial society;
when Veblen denounced the “robber barons”; and when Keynes
corroborated government intervention during the Great Depression. It
is not surprising at all that analyses and remedial measures proposed
by economists should vary not only amongst the different “Schools
of Thoughts” but also through time.

If in political science, the adage goes “the punishment for those
people who don’t have interest in politics is that they are governed
by the people who do”, then perhaps we could say something similar
in economics. By ignoring certain economic dissentions, the individual
is giving a permit for those involved in the discussion to overlook his
or her interests. It is important for citizens to follow and have a say
in some economic feuds and disputes if they are interested in their own
economic welfare.

It is impossible to understand economics without mastering mathematics
and logic. One must also understand human behavior and how people congregate
to express and enforce their opinions. It is also necessary to understand
how societies are governed and want to be governed. It is vital to somehow
amalgamate mathematics, philosophy, sociology, history and politics in
lines of thought that are profound, cohesive and meaningful. One needs
to build philosophical nets of assumptions and chains of events without
losing track of applicability and policy implications. One has to be
theoretically and practically oriented at the same time; to be able to
combine abstract philosophical reasoning, supported and expanded by a
mathematical skeleton and still obtain concrete results and implications
sometimes in the very same paragraph. This is not straightforward.

Under such circumstances, it is not surprising to learn that Max Planck—discoverer
of Quantum Mechanics and one of the brightest minds of the twentieth
century—once told John Maynard Keynes that he was thinking of
switching to economics but at a certain point gave up deeming it to be
too difficult a discipline. [4]